U.K. Factory Slump Ease Adds to Case for BOE to Hold QE: Economy

By Scott Hamilton -
Sep 3, 2012

A U.K. manufacturing index rebounded
more than economists forecast in August as output barely
contracted, adding to the case for Bank of England policy makers
to refrain from injecting further stimulus into the economy.

The Bank of England will maintain its quantitative-easing
program this week as officials assess the impact of their bond
purchases and measures to boost credit. The central bank cut its
economic forecasts last month amid the continuing debt turmoil
in the euro area, where a report today showed factory output
shrank more than initially estimated in August.

The U.K. report “reinforces belief that the BOE is highly
likely to keep all aspects of monetary policy unchanged” this
week, said Howard Archer, an economist at IHS Global Insight in
London. “Nevertheless, further QE remains very much on the
cards for the fourth quarter.”

The pound rose against the dollar after the report and was
trading at $1.5887 as of 11:32 a.m. in London, up 0.1 percent on
the day. Government bonds fell, with the yield on the 10-year
gilt up 1 basis point at 1.64 percent.

Pressure Eases

Producers of consumer goods increased output last month and
a “severe decline” in new orders caused by Europe’s debt
turmoil eased to a “broad stagnation,” Markit and CIPS said.

While manufacturers saw inflows of new work hold broadly
steady in August, this followed four consecutive months of
contraction. The rate of decline in new export orders also eased
sharply and manufacturing employment increased for a second
month. Factories continued to raise their average selling
prices, reflecting efforts to recover some of the margin lost
earlier in the year.

“We have witnessed a return to the status quo of flat
growth in a fragile economy,” CIPS Chief Executive Officer
David Noble said. “This optimism, however, is set firmly in the
context of a slowing global economy. The U.K. manufacturing
sector continues to struggle against economic headwinds,
especially from Europe.”

Markit’s index of U.K. construction companies due to be
published tomorrow may show the industry stagnated last month,
while a services measure on Sept. 5 may show growth accelerated,
economists said in separate polls.

BOE Decision

The services report comes a day before the Bank of England
announces its latest monetary-policy decision. The Monetary
Policy Committee, which will complete a 50 billion-pound ($79
billion) round of bond purchases in November, will maintain its
current target at 375 billion pounds on Sept. 6, according to 38
out of 39 economists in a Bloomberg survey. It will also leave
the key interest rate at a record-low 0.5 percent, all 51
economists said in a separate poll.

The Confederation of British Industry and the British
Chambers of Commerce both urged the government to take measures
to stimulate growth last week as they forecast the economy will
contract this year.

The Engineering Employers’ Federation cut its forecast for
manufacturing today and said the industry will shrink 1.5
percent this year before growing by a similar amount in 2013.
The lobby group previously estimated growth of 0.1 percent and
2.2 percent respectively. A quarterly survey by the EEF showed
factory output and orders dropped to their lowest levels in
almost three years last month.

Monetary Stimulus

European stocks rose for a second day on speculation
central banks will take more steps to boost growth as reports
signaled the economic slowdown is deepening. The Stoxx Europe
600 Index added 0.6 percent, while the German and French equity
benchmarks also rose. The U.S. market is closed for the Labor
Day holiday.

Federal Reserve Chairman Ben S. Bernanke said Aug. 31 that
he wouldn’t rule out more stimulus. European Central Bank
President Mario Draghi may unveil details of a revival of a
bond-purchase program after a policy meeting in Frankfurt on
Sept. 6.

In the euro area, a manufacturing index was at 45.1 in
August, below the 45.3 initially reported, Markit said today.
The gauge, which stood at 44 in July, has been below 50 for 13
months. A Chinese manufacturing measure by HSBC Holdings Plc and
Markit was at 47.6, indicating the fastest contraction in more
than three years.

Elsewhere, Sweden’s manufacturing unexpectedly shrank in
August at the fastest pace since May 2009 as the krona’s
appreciation sent export orders plunging amid sagging demand
from debt-stricken euro area.

The purchasing managers’ index fell to a seasonally
adjusted 45.1 from 50.6 in July, Stockholm-based Swedbank AB (SWEDA),
which compiles the gauge, said today. The index was seen falling
to 50.1, according to the average estimate of 10 economists
surveyed by Bloomberg.